Protect Your Business From Vendor Associated Risk

Michael Breler
Client Advocate

Most organizations today depend on external vendors to provide goods and services necessary to run daily operations. Apart from the apparent cost in engaging in these relationships, it is also important to understand that vendors can add complexity to an organization’s overall risk. Failure to manage this risk can further add to the cost factor of the vendor relationship. In some cases the additional cost can be severe enough to leave you in financial distress or even put you out of business.

Fortunately, there are some simple and cost-effective strategies for managing vendor risk. The most important one, perhaps, involves the development of contractual agreements that are designed to transfer high risk and high frequency exposures to your vendors. This risk management strategy, also known as contractual risk transfer, commonly provides drafting indemnification, hold harmless, and defense agreements. Additionally, it ensures appropriate coverage, limits, and endorsements are being requested from each specific vendor. A vendor contract alone, however, is not sufficient to mitigate your risk for litigation and financial loss. Without a systematic process for requesting and tracking incoming certificates there is no control measure in place to ensure that each vendor is complying with the insurance requirements outlined in the agreement.

Consider the following case study:

Problem
A regional wholesaler utilized a temporary staffing agency to supply additional labor. One of the temporary employees while performing duties for the company was critically injured resulting in a $1.5 million settlement. The wholesaler was deemed liable. The staffing agency’s workers compensation carrier indemnified the injured employee as due, but turned around and

subrogated against the wholesaler’s general liability carrier. Because the company had failed to request and obtain a waiver of subrogation endorsement from the staffing agency, the staffing agency’s workers compensation carrier was able to recover its payments to the injured employee. To add further insult, the wholesaler’s carrier ended up non-renewing their insurance and the company was now stuck with a catastrophic claim on their loss history making them subject to substantially higher insurance rates.

Solution
This case may have been prevented if the wholesaler had required the staffing agency to provide a waiver of subrogation in their favor. This clause could have been incorporated into the contract and verified by requesting and obtaining a compliant certificate of insurance from the staffing agency.

In today’s litigious business environment, failure to effectively manage the risks associated with vendors is not only widespread but also extremely hazardous to the sustainability and profitability of any organization. The implementation of carefully drafted contractual agreements and a comprehensive certificate-tracking program can be an extremely cost-effective solution.  It minimizes potential liability exposures and helps you mitigate the risks of litigation, financial loss, business interruptions and higher insurance rates that ultimately could endanger the health of your organization.